DPU growth could have been stronger…

We note that the manager elected to receive 67.5% of management fees in the form of units (2QFY17: 100%). Assuming 100% of management fees had been taken in the form of units, 2QFY18 DPU would have been 1.77 Acts (instead of 1.70 Acts) vs. 1.75 Acts for 2QFY17.

Portfolio update

Portfolio occupancy remained full at 99.4% with weighted average lease expiry (WALE) of 6.75 years. FLT renewed/signed three leases (two in Sydney and one in Melbourne) in the quarter with -7.3% rental reversion.

In particular, FLT managed to get Ball and Doggett (Sydney tenant) to expand and extend its lease for 10 years. The Ball and Doggett lease was originally due to expire in 2021. With these renewals, a minimal 1.1% of gross rental income (GRI) is due in FY18, and 10.3% in FY19.

Capital management

Gearing improved to 30.5% as at end-2QFY18 (1QFY18: 30.9%). Finance expenses increased 17% y-o-y due to higher borrowings for the Australian portfolio acquisition.

Weighted average cost of debt also increased 10bp q-o-q to 2.9% p.a. as FLT sought to hedge more borrowings at fixed rate. 85% of borrowings are hedged vs. 68% in 1QFY18.

Attractive entry point emerging

FLT’s unit price has retraced by c.6% since it proposed the portfolio acquisition of 21 European assets from sponsor for c.S$1bn. While we are cognisant of the overhang from the sizeable equity fund raising, the relative mild accretion vs. the deal size and higher gearing post-acquisition, we now see an attractive entry point emerging.

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